How Personal Loans Impact Your Credit Score in Canada

March 01, 2022

How Personal Loans Impact Your Credit Score in Canada

Updated February 2026

A personal loan can help and hurt your credit score, depending on how you manage it. In the short term, taking out a loan may temporarily lower your credit score and make it more challenging to obtain additional credit. On the other hand, it might boost your credit score if you make your payments on time in the long term. Therefore, always research your options before you apply for a loan. If you’re working on improving your score first, read our guide on how to improve your credit score in Canada.

Quick Answer: Do Personal Loans Affect Your Credit Score?

A personal loan can affect your credit score in both positive and negative ways:

• Short-term impact: your score may drop slightly due to a hard credit check

• Long-term benefit: consistent on-time payments can help improve your credit history

• Biggest risk: missed payments or taking on more debt than you can afford

If managed responsibly, a personal loan can help build credit over time in Canada.

How Credit Scores Work in Canada (And Why Loans Affect Them)

In Canada, your credit score is calculated mainly using information from the two credit bureaus: Equifax Canada and TransUnion Canada. Your score is influenced by several factors, including:

• Payment history (making payments on time)

• Credit utilization (how much revolving credit you use, like credit cards)

• Credit history length

• New credit applications (hard inquiries)

• Credit mix (different types of credit accounts)

Personal loans affect multiple parts of your credit profile, which is why they can temporarily lower your score at first — but potentially improve it over time.

Do Personal Loans Require a Hard Credit Check?

The lender will run a credit check on your credit report when you apply for any personal loan. When this happens, your credit score will lower by a few points. A soft credit check occurs when you receive a pre-approved offer from a lender; however, this check will not affect your credit score. 

Be mindful if you are applying for many different loans at once, as it gives lenders the impression you’re a high-risk customer who is in a vulnerable financial position. Research and shop around before applying for a personal loan to ensure you are highly likely to be approved. 

How Many Points Does a Personal Loan Application Drop Your Credit Score?

In many cases, a hard credit inquiry may lower your credit score by a few points. For most Canadians, the impact is usually temporary and may recover within a few months — especially if you continue making payments on time and avoid applying for multiple loans at once.

However, the exact impact depends on factors like:

• your current credit score

• how many recent inquiries you already have

• your overall credit history

• whether you’ve missed payments in the past

If your credit file is newer or your score is already low, the impact may be more noticeable.

Can Personal Loans Help Improve My Credit Score?

You can improve your credit score in the long term by contributing to your affordability and helping you build a favourable credit history. 

Your credit mix refers to the different credit accounts you have; credit cards, loans, mortgages, etc. Lenders need to see that you have managed your credit responsibly, made payments on time, and followed the terms of your loan. This will tell the lenders that you are a responsible borrower. This, in turn, will also help build your credit score.

While a personal loan won’t directly factor into your credit utilization ratio if you use it to pay off a credit card, this can lower your credit utilization ratio. We refer to this type of loan as debt consolidation, and it can help you manage your debt and improve your credit over time. 

How a Personal Loan Can Help vs Hurt Your Credit Score

How Can a Personal Loan Harm My Credit Score?

Here’s a breakdown of how a personal loan might hurt your credit score, primarily if it’s not managed correctly:

Creating a hard check on your credit report

The lender will create a hard check on your credit report whenever you apply for a personal loan. This lowers your credit score by a few points, but the dip in your score should only last for a few months. However, multiple hard inquiries can cause more damage to your score. Therefore, it is essential to understand your credit score and report before applying and minimize the number of applications you make.

In general, if you already have a healthy credit score and a history of timely payments, it will lessen the impact of a hard check on your credit score. 

Taking on more debt

When you take a personal loan, you incur more debt. Therefore, using a personal loan to pay off high-interest debt, such as credit cards, may make sense. However, you will need to make sure you change your spending habits and debt management plans too so that you don’t end up in the same position with a poor credit status. 

Missed payments and additional fees

It would be best to cover the regular repayments on your loan as per your loan agreement. If you miss a payment, not only will your credit score suffer, but the lender may charge additional fees. In addition, creditors will report you to credit bureaus for all missed payments. Finally, the regular missed payment will result in a default on your loan, which will cause significant damage to your score and makes it more challenging to get credit in the future.   

What Credit Score Do You Need for a Personal Loan in Canada?

In Canada, a credit score ranges between 300 and 900: 

Poor – between 300 and 574

Below average – between 575 and 659

Fair – between 660 and 712

Good – between 713 and 740

Excellent – between 741 and 900

With a fair or above score, you’ll have access to loans from banks. If you have a high score, you’ll have more options for lenders with lower interest rates.

You will have difficulty accessing a personal loan with below-average or poor credit, but it is not impossible. In that case, you may want to explore options for bad credit personal loans in Canada. You can find lenders specializing in lending to those with below-average credit, but be wary of these as their interest rates can be up to 30% because the lender views you as a high-risk customer. 

Bear in mind that some lenders will look at factors other than your score when deciding to approve you for a loan. For example, they may consider your income, bank balance, or employment history. 

Is a Personal Loan Used For Debt Consolidation Harmful to My Credit Score?

A popular option to consolidate your debt is to take out a personal loan. If you’re exploring this option, learn more about debt consolidation loans in Canada and how they work. When used correctly, debt consolidation can improve your credit and help pay off your debt sooner by lowering your interest rate and reducing your monthly payments. An added benefit is that it’s easier to manage one payment on one loan than multiple payments for all your loans or credit cards.

Applying for a personal loan will cause a temporary dip in your credit status; therefore, it can also make it harder to access other sources of credit in the near future. For example, if you apply for a mortgage shortly after applying for a personal loan, you may be rejected because the lender will see you have more debt than you can manage.

Over time, your credit score should recover and even improve by making all your payments on time. 

Common Reasons Canadians Use Personal Loans

A personal loan is the most common and effective way to consolidate high-interest debt, such as credit card debt. Other circumstances where a personal loan can be helpful are to finance a significant expense such as home improvements or a wedding or to resolve a high-cost emergency. 

Trusted Sources (Canada)

Credit scoring and lending rules can vary depending on your financial situation and province. For accurate information, you can also review guidance from trusted Canadian sources such as:

• Financial Consumer Agency of Canada (FCAC)

• Equifax Canada

• TransUnion Canada

• Government of Canada financial literacy resources

If you’re unsure whether a personal loan is right for your situation, consider speaking with a licensed financial professional.

Frequently Asked Questions About Personal Loans and Credit Scores in Canada

Do personal loans build credit in Canada?

Yes. If your lender reports payments to Equifax or TransUnion, making on-time payments can help build your credit history over time.

Is it better to use a personal loan or credit card?

It depends. Credit cards can be more expensive due to higher interest rates, while personal loans often have fixed payments and lower rates. However, credit cards may be useful for short-term borrowing if you can pay the balance off quickly.

Does paying off a personal loan early improve your credit score?

Paying off a loan early may help reduce your overall debt load, but it may not always increase your score immediately. Credit scores depend on multiple factors such as payment history and credit mix.

How long does a personal loan stay on your credit report?

A personal loan can remain on your credit report for several years, even after it is paid off, depending on the credit bureau and the account history.

Will applying for multiple loans hurt my credit score?

Yes. Multiple applications can create several hard inquiries, which may reduce your score and make you appear higher-risk to lenders.

Conclusion

Personal loans can negatively impact your credit score in the short term and can also help build your score over the long term. Ensure you have a good understanding of your credit status and try to improve it (if needed) before applying for a loan. Monitor your score regularly and practice healthy credit management to improve your credit over time.

Thinking About Applying for a Personal Loan?

Before applying, it’s a good idea to check your credit score, compare lenders, and understand the total cost of borrowing. The right personal loan can help you consolidate debt, cover emergency expenses, and potentially improve your credit over time.

If you’re not sure what you qualify for, you can compare options and explore loan solutions based on your credit profile.

Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or credit advice. Loan approval, interest rates, and credit score impacts vary depending on your personal financial situation and lender policies. Always review loan terms carefully and consider consulting a licensed professional if you need personalized advice.